This is what the “smart money” is saying now

May 24, 2016 | Kim Iskyan

Global stock markets are up 12 percent from their recent February lows. But recent moves by some of the world’s most successful investors show that they think stocks are headed down. And they’re looking at an asset that we’ve been talking about recently instead.

As we’ve written about before, in the world of investing there is “smart money” and what some consider “dumb money.” “Smart money” refers to professional investors who have more and better information than the general investing public. This includes hedge funds, large institutional investors and wealthy private investors. They have teams of analysts who do nothing but look for the best stocks and markets to buy.

“Smart money” tends to be the first and fastest to flee markets in anticipation of adverse conditions – and the earliest to buy markets that become bargains.

In contrast, so-called “dumb money” refers to non-professional investors who tend be on the wrong side of markets. It includes individual and retail investors who tend to panic and sell into falling markets just before they head higher. They also tend to get optimistic at the worst times – buying just before markets peak and turn lower. The investing public tends to make more impulsive and emotional decisions.

That doesn’t mean that the so-called “smart money” isn’t prone to these same errors, of course. And “smart money” actually often isn’t that smart. Over the long term, investors usually do better in a boring index fund than in a fancy “smart money” vehicle.

Still, the “smart money” can have a good read on market trends, and is worth paying attention to. Bank of America Merrill Lynch, a big bank and brokerage house in the U.S., tracks the money flows of U.S. “smart money” investors. According to a recent report, “smart money” has been a net seller of stocks for 16 consecutive weeks, which is the longest uninterrupted selling streak since 2008.

This means that the best-informed investors are selling more stocks than they’re buying, and putting their money in bonds and money market funds (that pay close to zero interest). This suggests that they’re more concerned about not losing money than making money.

Moves by two of the highest-profile members of the “smart money” club show that big investors are worried that stocks will fall in coming months.

Carl Icahn is worth US$17 billion and is a legendary investor and corporate raider. (We wrote about one of his rare investment mistakes here). Recent filings show that Icahn is 150 percent short the market. This means that the value of Icahn’s firms’ short positions – investments that will profit from falling prices – are worth 1.5 times the value of his long positions. That means that he’s hugely pessimistic about the stock market.

Indeed, last month Icahn warned on CNBC that “a day of reckoning” was coming for American stock markets unless the U.S. government stimulates the economy with more spending. He asserted that stock prices are at artificially high levels compared to business fundamentals and are being supported by low interest rates.

Meanwhile, another living legend billionaire investor, George Soros, is also bearish on global equity prices.

During the first quarter of this year, Soros doubled his bets that the S&P 500 would fall. His firm also has a big bet on U.S. markets falling, which he doubled relative to the end of 2015. He also sold more than a third of his U.S. stocks.

And, after a several years of precious metals inactivity, Soros started investing in gold. His firm acquired 1.05 million shares in the SPDR Gold ETF (New York Stock Exchange; ticker: GLD), worth about US$123.5 million. His firm also purchased US$264 million worth of Barrick Gold (NYSE; ticker: ABX) shares, the world’s largest gold miner.

Since gold acts as a hedge against falling markets, Soros’ gold buys can tell us how this “smart money” investor feels about the global stock market.

Soros is also known to be bearish on China. In April, Soros was quoted by Bloomberg as saying China’s current situation “eerily resembles what happened during the financial crisis in the U.S. in 2007-08, which was similarly fueled by credit growth.”

Earlier in the year, Soros publicly stated that for the Chinese currency “a hard landing is practically unavoidable.” That comment caused China’s state-run Xinhua news agency to call Soros “a financial crocodile.” And as we wrote about at the time, the government’s response shows that Soros is probably right – although it may take a while for him to be proven correct.

George Soros and Carl Icahn are right more often than they’re wrong. But even the greatest investors are fallible. There is no guarantee that the “smart money” bearishness on global stocks is correct, or that gold is going to go up.

However, when the most sophisticated professional investors, with the best information, are telling you they see risk in equities, it makes sense to pay attention.

Kim Iskyan

About Kim Iskyan

Kim Iskyan has nearly 25 years of experience as a stock analyst, hedge fund manager, political risk consultant, and financial commentator in more than half a dozen emerging and frontier markets.

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